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A Baton Rouge entrepreneur's plan to build a Louisiana-based airline with a hub in New Orleans seems stuck on the ground because of state concerns.

The Microsoft Corporation's decision to cancel its convention in New Orleans because of inadequate air service reignited public discussion of a proposal by John Miller of DirectAir Holdings LLC to make New Orleans the hub of a new airline envisioned by Miller and backed by $300 million in state loan guarantees. However, frustrated by three years of evaluation and modification -- but little or no progress -- DirectAir has scuttled the idea and Miller is talking about giving up altogether in Louisiana.

Gov. Kathleen Blanco initially referred the proposal to her Department of Economic Development (DED) for review more than two years ago, after meeting with DirectAir. Talks between Miller and the state halted just before Katrina, when DirectAir asked the state for a non-binding letter of understanding to move forward with the project. After attempting to garner public support for the plan post-Katrina -- including three meetings with DED -- DirectAir has withdrawn its plan from Louisiana. Meanwhile, the state remains focused on other projects.

Post-Katrina airline service from Louis Armstrong New Orleans International Airport, a catalyst for the renewed discussion, has suffered significantly with only 109 flights per day in November. That's down from 165 flights a day pre-Katrina, according to Interim Aiport Director Sean Hunter. Hunter adds that while the number of daily flights stands at roughly 66 percent of the airport's pre-Katrina levels, many airlines are using smaller planes these days -- putting the actual number of passengers at around 62 percent of the pre-Katrina level.

Armstrong International's struggle to recover flights and passengers was only the most recent argument that DirectAir put forth to promote Miller's vision. Supporters of DirectAir argue that a large number of new flights would be the best way to re-energize New Orleans' tourism-based economy. Others, including the state and existing airlines, maintain that the economy first needs to demonstrate a need for more flights.

The particulars of the DirectAir proposal included a potential backstop loan from the state totaling $300 million over a seven-year period -- to cover initial losses that DirectAir may incur during its start-up phase. On the private investment side, Miller estimated that DirectAir would need to raise an initial $2 billion to acquire an existing airline and cover other associated start-up costs.

Miller claims investment would come from various sources that have already expressed an interest and participated in discussions with the state. According to the business plan submitted to Gambit Weekly by DirectAir, the loan from the state would not be tapped until DirectAir reached certain mileposts, such as operating 50 aircraft, and then only if the airline loses money. "The risk for Louisiana is low," says Miller, "because the state has no stake in how much it's going to take to get to 50 aircraft."

Getting to 50 planes as quickly as possible, Miller says, is the key to the plan's success. He points to other hubs such as Atlanta and Houston, where having more planes and destinations allows each flight segment to serve numerous traffic flows through many different cities. The result is what is known as the "multiplier effect" -- having more planes and destinations causes income -- and profitability -- to increase disproportionately. "No airline has ever been funded going in to get to 50 aircraft," Miller says. "And that's why most fail. They don't have that multiplier effect."

Additionally, DirectAir was seeking an exemption from the 4 percent fuel tax that the state collects from other airlines. In return, DirectAir pledged to maintain a New Orleans hub that would bring a $3 billion economic impact to the region -- and new air service to the state's seven metropolitan airports, as well as other benefits.

"Everyone in the state is our partner, because the state would make an investment on behalf of the people of Louisiana," says Miller.

Other benefits would include guaranteed direct low-fare flights to 40 domestic and 10 international destinations that would cost, on average, $100 less for round trips than current industry prices; a profit-sharing program in the form of flight rebates; and a program for discount service to Katrina evacuees still trying to come home. Also included in the proposal was an annual marketing budget of $25 million, which would help promote the state of Louisiana. That figure would tower over the current marketing budgets of the state and the New Orleans Metropolitan Convention and Visitor's Bureau combined.

Miller insists that the state's involvement as a backstop lender is an essential inducement for investors. Even before Katrina, New Orleans was not as attractive an investment as some larger, more proven markets such as Dallas, St. Louis or Pittsburgh. Miller says his proposal could still work in Louisiana, but the state wouldn't be anyone's first choice. "When you're last in everything, you've got to do things a little differently," says Miller.

Miller notes that DED already invests heavily to attract and assist private companies relocating to Louisiana. He points to several billion dollars of capital investment for related infrastructure and tax breaks -- all noted in DED's 2005 annual report. (The 2006 report has not been released yet).

"They (the state) cannot believe that I'm trying to wear two hats in trying to get this deal done. I'm trying to balance what's in the absolute best interest for the state but also so that the investors can win," says Miller, a Louisiana native best known as the entrepreneur who put together the Country Club of Louisiana in Baton Rouge.

Despite Miller's enthusiasm and confidence, the state has raised a number of concerns. DED Secretary Michael Olivier recently told Citybusiness that the state does not have enough money for the venture. The state also is wary of investing taxpayers' money in the volatile airline industry.

Recently, the state appears to have gotten burned on a venture with Transcaribbean Airways, an airline that has yet to get off the ground despite getting $500,000 in state money for employee training. The Legislative Auditor stated in a January report that the employee training may never have taken place. DED maintains that that experience had no influence on its consideration of the DirectAir proposal.

In addition, DED executive counsel Richard House says he's concerned about the airline industry in general. "You have nearly full planes, and you have businesses that are long-established carriers with huge fleets that are losing billions of dollars," House says.

Most recently, the state raised questions about Miller's potential investors -- starting with who and where are they? The state also claims that DirectAir has not been forthcoming about its sources of capitalization and its proposed management team. "We've asked for those things just about every time we've met with him and we have never received them," says House, who adds that DED would undertake a thorough evaluation if those demands were met. Without those disclosures, House says, Miller's proposal does not even resemble a business plan but rather "a nice PowerPoint presentation."

House's statement about DirectAir's business plan was confirmed by Olivier via email while Olivier was traveling in Asia to promote economic development in Louisiana.

"When you're talking about priorities," says House, "do you give your priority to a hypothetical situation, where there are a whole lot of questions that need to be answered if you read these reports -- or do you give your priorities to companies that have investors, that have a structure, that have ideas, that are out in the marketplace trying to do things?"

Miller scoffs at the state's concerns, saying that he has had investors in meetings and conference calls with DED and that any management structure would come from the existing structure of the acquired airline that DirectAir would purchase if the deal were to materialize. Beyond the state's concern over investors lies the issue of the state's $300 million actually functioning as a backstop loan -- instead of a scenario that House raises, one in which DirectAir comes up short in start-up funding but overextends its operating costs (possibly by borrowing heavily and incurring large interest expenses) to trigger the state's loan, effectively transforming the state's "backstop" position into an up-front investment.

Miller says all of the state's concerns are just different forms of official reluctance to go forward with the proposal. "They've never even offered a counter-proposal," says Miller. "They haven't even refuted the first number."

Miller points to the proposed letter of understanding that originally brought negotiations to a halt just before Katrina. He says he needed the non-binding letter of understanding from the state before he could lock down the remaining investors. Then, he says, a full disclosure of investors could have been provided -- thus allaying one of House's primary concerns.

The state answers that it needed to see capitalization sources and management structure before signing the letter, which state officials referred to as a "letter of intent." A document submitted to Gambit was titled "Preliminary Business Plan as a Basis for the Proposed Letter of Understanding." In any event, the state continued to view the DirectAir proposal as a purely hypothetical proposal.

Hypothetically, Louis Armstrong New Orleans International airport is a natural place for an airline to station a hub. There's already enough existing runway and terminal space, so no new construction is needed. There's also an existing support infrastructure from the city's tourism-based economy, including hotels, taxis and a convention center. Additionally, the city has other draws such as the port, cruise ships and the gaming industry. The city also is strategically positioned to be a launch pad for destinations in Latin America.

The New Orleans Airport Board, in an attempt to foster negotiations between DirectAir and DED, commissioned a study in May 2005 by the Boyd Group, a leading independent airline industry analyst, to assess the feasibility of DirectAir's plan. The report focused on the DirectAir model after it reached 50 aircraft -- the trigger for the state's $300 million backstop loan -- and recommended several changes to DirectAir's initial business plan. It also raised concerns about some of Miller's assumptions. Overall, however, the report concluded that the concept has merit -- and that DirectAir seemed willing to make the changes necessary to succeed.

"The opportunity for DirectAir in the post-Katrina environment is clearly stronger because the market is less competitive," says Tim Sieber, vice president and general manager of the Boyd Group. When asked to speculate as to why the state has not shown more interest in the plan, Sieber says, "It's so far out of the box that a lot folks, government bureaucrats in particular, can't seem to get their hands around the concept. It's a revolutionary approach. If DirectAir ever moves from on paper to the runway, it will surely have a significant economic impact."

The plan's economic impact post-Katrina, says Miller, would address what he calls the chicken/egg issue that currently stifles the New Orleans economy -- every sector is waiting for something to happen, but no one knows who should go first.

"What else as a state can we do that can potentially benefit every single individual, every single business, every single nonprofit in the state of Louisiana other than providing a superior air-transportation system?" Miller asks.

Noting the Microsoft cancellation, Miller points to his projections of 3,000 new jobs, 50,000 indirect jobs, and a $3 billion economic impact. He claims that could be a catalyst for economic recovery and attract companies like Microsoft back to New Orleans. "How do we compete the way everyone else competes?" Miller says. "We can't right now. We have to do something ourselves that's generated from within Louisiana -- and this is it."

For its part, the state is moving forward with other economic development projects. "We have real projects right now," says House, "that we deal with in a variety of creative ways to try and put businesses in a position where it can come to Louisiana and make money and give people lots of jobs that are very well paid. I don't particularly like to deal with hypothetical situations."

As Miller effectively pulls his deal from Louisiana, he opens the door for neighboring Mississippi.

"I'm not going to tell you what other state I would take it to," Miller says, "but I will tell you this: If you go onto the Web site of Mississippi, guess what they have outlined as being their No. 1 priority to build 30,000 rooms on the Gulf Coast. Air service."

While Mississippi's coastal airport is not big enough right now to be a hub, its very existence remains a concern for state Sen. Ken Hollis, R-Metairie, who chairs the Senate Commerce Committee and was instrumental in bringing together government and business in support of the DirectAir proposal. Hollis hopes the state will change its mind.

"They've got other fish to fry right now," he says, referring to DED. "The details of a start-up are a slippery slope, and I don't think this is on top of their radar screen -- so it's just kind of pushed to the side. ... [But] if we don't do this, how can we get back? If we don't get people here, how can we rebound? It's that simple."

Hollis adds that, in his opinion, "absolutely nothing is going to change Michael Olivier's mind" about DirectAir's prospects. He says he's going to "go around" Olivier and plead the case directly to Gov. Blanco.

"I've got to tell you," Hollis admits, "I'm not optimistic."

click to enlarge Supporters of DirectAir argue that a large number of new - flights would be the best way to re-energize New - Orleans' tourism-based economy. Others maintain that - the economy first needs to demonstrate a need for more - flights. - DONN YOUNG
  • Donn Young
  • Supporters of DirectAir argue that a large number of new flights would be the best way to re-energize New Orleans' tourism-based economy. Others maintain that the economy first needs to demonstrate a need for more flights.


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